The Socialist Theory of Exploitation Is Fallacious, and When Considered from the Point of View of Theoretical Soundness, It Occupies One of the Lowest Places Among All Theories of Interest

I have devoted an exceptionally and disproportionately large amount of space to the discussion of the exploitation theory. I have done so advisedly. Certainly none of the other doctrines has approached it in the influence it exercised on the thoughts and the emotions of whole generations. And just our era has seen it at its apogee. And unless I am mistaken, its descent has already begun. But it is to be expected that there will still be attempts at stubborn defense or at revivification by metamorphosis. And so I thought I should be serving the good cause if I avoided restricting myself to a purely retrospective critique of the  developmental stages of the doctrine, now definitely terminated. I thought it would be well to look forward, and even now cast some critical illumination on the intellectual theatre of operations to which, according to definitely discernible signs, its adherents are intending to transfer the renewed controversy.

So far as that old socialist theory of exploitation is concerned, which has been presented here in the person of its two most distinguished protagonists, Rodbertus and Marx, I cannot render a verdict any less severe than the one I handed down in the first edition of this book. It is not only fallacious but, considered from the point of view of theoretical soundness, it occupies one of the lowest places among all theories of interest. Grievous as may be the errors in logic made by the representatives of other theories, I hardly think that anywhere else are the worst errors concentrated in such abundance—frivolous, premature assumptions, specious dialecticism, inner contradictions and blindness to the facts of reality. The socialists are excellent critics, they are exceptionally weak theorists.

—Eugen von Böhm-Bawerk, The Exploitation Theory of Socialism-Communism: The Idea that All Unearned Income (Rent, Interest and Profit) Involves Economic Injustice; An Extract, 3rd ed. (South Holland, IL: Libertarian Press, 1975), xxx.

Antagonistic Interests Exist Between Producers and Those Who Acquire Wealth Nonproductively and/or Noncontractually in the Pre-Marxist View on Exploitation

In the Marxist tradition this stage of social development is termed “monopoly capitalism,” “finance capitalism,” or “state monopoly capitalism.” The descriptive part of Marxist analyses is generally valuable. In unearthing the close personal and financial links between state and business, they usually paint a much more realistic picture of the present economic order than do the mostly starry-eyed “bourgeois economists.” Analytically, however, they get almost everything wrong and turn the truth upside down.

The traditional, correct pre-Marxist view on exploitation was that of radical laissez-faire liberalism as espoused by, for instance, Charles Comte and Charles Dunoyer. According to them, antagonistic interests do not exist between capitalists as owners of factors of production and laborers, but between, on the one hand, the producers in society, i.e., homesteaders, producers and contractors, including businessmen as well as workers, and on the other hand, those who acquire wealth nonproductively and/or noncontractually, i.e., the state and state-privileged groups, such as feudal landlords. This distinction was first confused by  Saint-Simon, who had at some time been influenced by Comte and Dunoyer, and who classified market businessmen along with feudal lords and other state-privileged groups as exploiters. Marx took up this confusion from Saint-Simon and compounded it by making only capitalists exploiters and all workers exploited, justifying this view through a Ricardian labor theory of value and his theory of surplus value. Essentially, this view on exploitation has remained typical for Marxism to this day despite Böhm-Bawerk’s smashing refutation of Marx’s exploitation theory and his explanation of the difference between factor prices and output prices through time preference (interest). To this day, whenever Marxist theorists talk about the exploitative character of monopoly capitalism, they see the root cause of this in the continued existence of the private ownership of means of production. Even if they admit a certain degree of independence of the state apparatus from the class of monopoly capitalists (as in the version of “state monopoly capitalism”), for them it is not the state that makes capitalist exploitation possible; rather it is the fact that the state is an agency of capitalism, an organization that transforms the narrow-minded interests of individual capitalists into the interest of an ideal universal capitalist (the ideelle Gesamtkapitalist), which explains the existence of exploitation.

In fact, as explained, the truth is precisely the opposite: It is the state that by its very nature is an exploitative organization, and capitalists can engage in  exploitation only insofar as they stop being capitalists and instead join forces with the state. Rather than speaking of state monopoly capitalism, then, it would be more appropriate to call the present system “state financed monopoly socialism,” or “bourgeois socialism.”

—Hans-Hermann Hoppe, “Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order,” in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 95-97n18.

Mises's Fundamental Axiom, the Nub of Praxeology, Is the Existence of Human Action; Men Have Some Ends and They Use Some Means To Try To Attain Them

We turn now to the Fundamental Axiom (the nub of praxeology): the existence of human action. From this absolutely true axiom can be spun almost the whole fabric of economic theory. Some of the immediate logical implications that flow from this premise are: the means-ends relationship, the time-structure of production, time-preference, the law of diminishing marginal utility, the law of optimum returns, etc. It is this crucial axiom that separates praxeology from the other methodological viewpoints-and it is this axiom that supplies the critical “apriori” element in economics.

First, it must be emphasized that whatever role “rationality” may play in  Professor Machlup's theory, it plays no role whatever for Professor Mises. Hutchison charges that Mises claims “all economic action was (or must be) ‘rational.’ ” This is flatly incorrect. Mises assumes nothing whatever about the rationality of human action (in fact, Mises does not use the concept at all). He assumes nothing about the wisdom of man's ends or about the correctness of his means. He “assumes” only that men act, i.e., that they have some ends, and use some means to try to attain them. This is Mises’ Fundamental Axiom, and it is this axiom that gives the whole praxeological structure of economic theory built upon it its absolute and apodictic certainty.

—Murray N. Rothbard, “In Defense of ‘Extreme Apriorism,’” Southern Economic Journal 23, no. 3 (January 1957): 317.

There Is No Consistency in Keynes's Use of the Term “Rate of Interest”; Keynes Also Fails to Adhere to His Own Theory of Interest (Liquidity Preference and Quantity of Money)

Let us consider first Keynes's failure to adhere to fixed meanings for his terms.

Keynes at times uses the rate of interest to mean a rate of discount, measuring the premium on present goods over future goods. This is implied in his initial definition of the marginal efficiency of capital, to which later reference is made on page 135 of this book. It is, moreover, made explicit by Keynes on page 93 of his book, where he says that, as an approximation, we can identify the rate of time-discounting, i.e., the ratio of exchange between present goods and future goods, with the rate of interest. Later, however, Keynes gives us a radically different theory of interest. He makes the rate of interest depend on liquidity preference and the quantity of money. And he holds that interest is not paid for the purpose of inducing men to save but for the purpose of inducing men not to hoard. He holds that if money is made sufficiently abundant so that it can satiate liquidity preference, it will pull down, not merely the short time rate of interest or the short time money rates, but also the whole complex of interest rates, long and short. The whole complex of interest rates (with a given liquidity preference scale) can be governed, and is governed, in his system, by the abundance or scarcity of money. Interest becomes a phenomenon of money par excellence. Strangely enough, however, we find Keynes playing with the notion of commodity rates of interest, or “own rates of interest,” the rate between future wheat and present wheat, and designating this rate as the “wheat rate of interest.” Every commodity can have its own rate of interest in terms of itself, and Keynes says that there is no reason why the wheat rate of interest should be equal to the copper rate of interest, because the relation between the spot and future contracts as quoted in the markets is notoriously different for different commodities. The reader will find whatever he pleases in Keynes about the rates of interest, though his formal theory is the doctrine that the quantity of money, taken in conjunction with liquidity preference, governs the rate of interest.

But Keynes does not adhere long to his own theory of interest. In the same volume, 29 pages later, he has abandoned it. After saying, on pages 167-168, that the supply of money in relation to liquidity preference will govern the whole complex of interest rates, long and short, on page 197 he criticizes the Federal Reserve banks for their open market policy, 1933-1934, on the ground that they purchased only short term securities, the effect of which “may, of course, be mainly confined to the very short term rate of interest and have little reaction on the much more important long term rates of interest.” And he calls upon the central banks to regulate all rates of interest by having fixed rates at which they will buy obligations of differing maturities, long and short.

There is no consistency in Keynes's use of the term “rate of interest” in this volume.

--Benjamin M. Anderson, “Digression on Keynes,” in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 199-200.

Hardly Any Economists in America Anticipated that Price-Level Stabilization during the 1920s Would Lead to the Economic Depression that Began in October 1929

Hardly any economists in America anticipated that price-level stabilization during the 1920s would lead to the economic depression that began in October 1929. One of the few who saw a danger in this policy of the Federal Reserve System was Benjamin M. Anderson. As the senior economist for the Chase National Bank of New York City throughout this period, Dr. Anderson authored the Chase Economic Bulletin, which was usually published four to five times every year. He offered detailed analyses of the economic currents in the United States, with special attention to monetary and banking policy and its likely effects on general market conditions. He also often critically evaluated the theories underlying Federal Reserve policy, most particularly the notion of stabilizing the price level as a guide for economic stability.

The most insightful bulletins on this theme were “The Fallacy of ‘The Stabilized Dollar’” (August 1920); “The Gold Standard vs. ‘A Managed Currency’” (March 1925); “Bank Money and the Capital Supply” (November 1926); “Bank Expansion and Savings” (June 1928); “Two ‘New Eras’ Compared: 1896–1903 and 1921–1928” (February 1929); “Commodity Price Stabilization as a False Goal of Central Bank Policy” (May 1929); and “The Financial Situation” (November 1929).

He argued that the Federal Reserve had used its powers to reduce the reserve requirements of member banks, had set the discount rate at which member banks could directly borrow from the Fed below the market rates of interest, and had used “open-market operations” to inject new reserves into the banking system. The increase in bank reserves available for lending purposes as a result of these Fed policies had generated a huge increase in demand deposits and especially in time deposits. As a result, a large monetary inflation had been created by the Federal Reserve during the 1920s.

But the price level had remained stable, producing, Benjamin Anderson said, a false sense of economic stability. In 1926 and 1928, he argued that the amount of bank credit created by Fed policy enabled the financing of new investments in excess of actual savings in the economy. Influenced by Joseph Schumpeter’s The Theory of Economic Development (1911), Anderson argued that monetary expansion in the form of bank credit lowered interest rates, which attracted additional borrowing for long-term investment projects. These additional bank loans with newly created money enabled investment borrowers to bid resources and labor away from consumption and other uses in the economy and redirect their use towards various types of capital formation. The monetary expansion, in other words, induced the undertaking of investment activities in excess of the actual voluntary savings upon which a stable pattern of investment is ultimately dependent. Thus, Federal Reserve policy was creating a serious imbalance in the savings-investment relationship of the American economy.

Anderson estimated that between 1921 and 1928, demand deposits at Federal Reserve member banks had increased 33.8%, while time deposits (whose minimum reserve requirements had been set by the Fed significantly lower than those required for demand deposits) had increased by 135.1%. The resulting increase in lendable funds, he said, fed real-estate and construction booms and produced a dramatic rise in stock-market speculation.

In February 1929, Anderson pointed out that “excessive bank reserves generate bank expansion, that bank expansion running in excess of commercial needs will overflow into capital uses and speculative employments, and that low interest rates and abundant credit will ordinarily reflect themselves in rapidly rising capital values.” In Anderson’s view, these all pointed to the inevitability of a corrective downturn.

--Richard M. Ebeling, “Benjamin Anderson and the False Goal of Price-Level Stabilization,” in Monetary Central Planning and the State (Fairfax, VA: The Future of Freedom Foundation, 2015), Kindle e-book.

Propagandists for Central Banking Have Convinced People that “Free Banking” Would Be Banking Out of Control with Wild Inflationary Bursts and the Supply of Money Soaring to Infinity

Let us assume now that banks are not required to act as genuine money warehouses, and are unfortunately allowed to act as debtors to their depositors and noteholders rather than as bailees retaining someone else’s property for safekeeping. Let us also define a system of free banking as one where banks are treated like any other business on the free market. Hence, they are not subjected to any government control or regulation, and entry into the banking business is completely free. There is one and only one government “regulation”: that they, like any other business, must pay their debts promptly or else be declared insolvent and be put out of business. In short, under free banking, banks are totally free, even to engage in fractional reserve banking, but they must redeem their notes or demand deposits on demand, promptly and without cavil, or otherwise be forced to close their doors and liquidate their assets.

Propagandists for central banking have managed to convince most people that free banking would be banking out of control, subject to wild inflationary bursts in which the supply of money would soar almost to infinity. Let us examine whether there are any strong checks, under free banking, on inflationary credit expansion.

In fact, there are several strict and important limits on inflationary credit expansion under free banking. One we have already alluded to. If I set up a new Rothbard Bank and start printing bank notes and issuing bank deposits out of thin air, why should anyone accept these notes or deposits? Why should anyone trust a new and fledgling Rothbard Bank? Any bank would have to build up trust over the years, with a record of prompt redemption of its debts to depositors and noteholders before customers and others on the market will take the new bank seriously. The buildup of trust is a prerequisite for any bank to be able to function, and it takes a long record of prompt payment and therefore of noninflationary banking, for that trust to develop.

There are other severe limits, moreover, upon inflationary monetary expansion under free banking. One is the extent to which people are willing to use bank notes and deposits. If creditors and vendors insist on selling their goods or making loans in gold or government paper and refuse to use banks, the extent of bank credit will be extremely limited. If people in general have the wise and prudent attitudes of many “primitive” tribesmen and refuse to accept anything but hard gold coin in exchange, bank money will not get under way or wreak inflationary havoc on the economy.

But the extent of banking is a general background restraint that does precious little good once banks have become established. A more pertinent and magnificently powerful weapon against the banks is the dread bank run—a weapon that has brought many thousands of banks to their knees. A bank run occurs when the clients of a bank—its depositors or noteholders—lose confidence in their bank, and begin to fear that the bank does not really have the ability to redeem their money on demand. Then, depositors and noteholders begin to rush to their bank to cash in their receipts, other clients find out about it, the run intensifies and, of course, since a fractional reserve bank is indeed inherently bankrupt—a run will close a bank’s door quickly and efficiently.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 111-113.

Ben Bernanke Spoke of Printing Money and Distributing It from Helicopters and about Roosevelt's 40% Devaluation of the Dollar Against Gold As Effective Weapons Against Deflation

This doctrine of globally beneficial dollar devaluation in recession had got further embellishment in Bernanke’s reading of the Japanese experience of the 1990s. Bernanke sympathized with the view that where monetary policy became constrained (in bringing about recovery) by a zero-rate bound (inability of rates to fall below zero even though the equilibrium level of rates may indeed be negative), then devaluation was the way out of this (partly through generating inflation expectations) and internationally acceptable (not beggar-your-neighbour) in that all would gain from the return route to equilibrium. Bernanke, as recently appointed governor to the Federal Reserve, had reinforced this view in his notorious speech to the National Economists Club in Washington (November 2002) under the title of ‘Deflation: making sure it doesn’t happen here’.

Bernanke’s comments about printing money and distributing it from helicopters got the headlines at the time (and since). But in addition the new governor noted aloud:

Though a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from US history is Franklin Roosevelt’s 40% devaluation of the dollar against gold in 1933–4, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the US deflation remarkably quickly. Indeed consumer price inflation in the US, year-on-year, went from −10.3% in 1932 to −5.1% in 1933 to 3.4% in 1934. The economy grew strongly and by the way 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

--Brendan Brown, The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution (Houndmills, UK: Palgrave Macmillan, 2011), 115.

Capital Goods Can Only Be Used If Corresponding Quantities of Consumer Goods Are Fed into the Production Process to Sustain the Laborers Who Work with These Capital Goods

Strigl builds his theory of the macroeconomy on an original account of the part played by different forms of capital. In particular, he stresses the fundamental role that consumer goods, or means of subsistence, play in connection with the fact that production takes time. When consumer goods are used to sustain laborers engaged in time-consuming roundabout production processes, they are used as “free capital.” Since without sustenance for laborers no such roundabout production processes can be started at all, consumer-goods-used-as-capital are the most fundamental or “originary form” of capital.

This fundamental insight, that productively-used consumer goods are originary capital, had already been expressed in Jevons's wage-fund theory of capital, and it is still common stock in Austrian economics. However, no one has surpassed Strigl in systematically analyzing the implications thereof, and in integrating these findings into a theory of the macroeconomy. His legacy to present day capital theorists rests to a great extent mainly on this contribution.

One important implication of this insight is that it is unwarranted to conceive of capital from a purely technological point of view. Machines, buildings, etc.—that is, those capital goods most readily identified with the notion of capital—are themselves products of previous production processes which, ultimately, make use of labor, land, and “productively-used” consumer goods. Moreover, capital goods can only be used if corresponding quantities of consumer goods are fed into the production process to sustain the laborers who work with these capital goods. Using capital goods in production processes and supporting these processes with consumer goods are nothing but two aspects of “one and the same process.”  In short, the quantities and qualities of capital goods in use at any time depend ultimately on what people choose to do with the consumer goods they control. A man can choose to use all his consumer goods in “pure consumption” or to use a part of them (his “savings”) in “productive consumption”; that is, he can use this part to sustain himself or others while being engaged in a productive venture. Depending on such choices, consumer goods become either pure consumer goods or originary capital. Hence, whether one and the same physical object is capital depends ultimately on the choices of the market participants; capital formation has a subjective basis.

—Jörg Guido Hülsmann, introduction to Capital and Production, by Richard von Strigl (Auburn, AL: Ludwig von Mises Institute, 2000), xvii-xix.

The Federal Reserve as Engine of Reverse Robin Hood Redistribution

The Fed really abandoned all pretense of being “independent” of politics in the aftermath of “The Great Recession” of 2008, although it continues on, with the help of its academic supporters, with the rhetoric and propaganda of “Fed independence.” Specifically, the Fed made it ever so obvious that its primary concern is protecting the bonuses of the Wall Street investment banking titans who, in turn, supply millions of dollars in campaign “contributions” to the executive and legislative branches and the two major political parties. (It is not just a coincidence that the U.S. Treasury Secretary is almost always a top executive at Goldman Sachs). The Fed does this by responding to bursted bubbles in real estate and stock markets, among other places, by pumping even more liquidity into the economy, thereby creating new bubbles—and new profit opportunities for Wall Street speculators. As David A. Stockman (2013, p. 653) wrote in his book, The Great Deformation, “[T]he central banking branch of the state remains hostage to Wall Street speculators who threaten a hissy fit sell-off unless they are juiced again and again. Monetary policy has thus become an engine of reverse Robin Hood redistribution; it flails about implementing quasi-Keynesian demand-pumping theories that punish Main Street savers, workers, and businessmen while creating endless opportunities . . . for speculative gain in the Wall Street casino.” Thanks to the Fed, the machinery of the state and the machinery of reelection have become coterminous, says Stockman.

Monetary inflation enriches the “one percenters” on Wall Street while impoverishing just about everyone else. By deterring savings with its policy of artificially lowering interest rates the Fed destroys much of the essential ingredient of economic growth—savings, investment, and capital accumulation.

--Thomas DiLorenzo, "A Fraudulent Legend: The Myth of the Independent Fed," in The Fed at One Hundred: A Critical View on the Federal Reserve System, ed. David Howden and Joseph T. Salerno (Cham, CH: Springer International Publishing, 2014), 69-70.

The Gold Standard Criticism of the Friedmanite Position Is that the Chicagoites Want a Free Market Between Entities that Are Different Units of the SAME Entity (Different Weights of Gold)

The Friedmanite program cannot be fully countered in its details; it must be considered at the level of its deepest assumptions. Namely, are currencies really fit subjects for “markets”? Can there be a truly “free market” between pounds, dollars, francs, etc.?

Let us begin by considering this problem: suppose that someone comes along and says, “The existing relationship between pounds and ounces is completely arbitrary. The government has decreed that 16 ounces are equal to 1 pound. But this is arbitrary government intervention; let us have a free market between ounces and pounds, and let us see what relationship the market will establish between ounces and pounds. Perhaps we will find that the market will decided that 1 pound equals 14 or 17 ounces.” Of course, everyone would find such a suggestion absurd. But why is it absurd? Not from arbitrary government edict, but because the pound is universally defined as consisting of 16 ounces. Standards of weight and measurement are established by common definition, and it is precisely their fixity that makes them indispensable to human life. Shifting relationships of pounds to ounces or feet to inches would make a mockery of any and all attempts to measure. But it is precisely the contention of the gold standard advocates that what we know as the names for different national currencies are not independent entities at all. They are not, in essence, different commodities like copper or wheat. They are, or they should be, simply names for different weights of gold or silver, and hence should have the same status as the fixed definitions for any set of weights and measures.

Let us bring our example a bit closer to the topic of money. Suppose that someone should come along and say, “The existing relationship between nickels and dimes is purely arbitrary. It is only the government that has decreed that two nickels equal one dime. Let us have a free market between nickels and dimes. Who knows? Maybe the market will decree that a dime is worth 7 cents or 11 cents. Let us try the market and see.”  Again, we would feel that such a suggestion would be scarcely less absurd. But again, why? What precisely is wrong with the idea? Again the point is that cents, nickels, and dimes are defined units of currency. The dollar is defined as equal to 10 dimes and 100 cents, and it would be chaotic and absurd to start calling for day-to-day changes in such definitions. Again, fixity of definition, fixity of units of weight and measure, is vital to any sort of accounting or calculation.

To put it another way: the idea of a market only makes sense  between different entities, between different goods and services, between, say, copper and wheat, or movie admissions. But the idea of a market makes no sense whatever between different units of the same entity: between, say, ounces of copper and pounds of copper. Units of measure must, to serve any purpose, remain as a fixed yardstick of account and reckoning.

The basic gold standard criticism of the Friedmanite position is that the Chicagoites are advocating a free market between entities that are in essence, and should be once more, different units of the same entity, i.e., different weights of the commodity gold. For the implicit and vital assumption of the Friedmanites is that every national currency—pounds, dollars, marks, and the like—is and should be an independent entity, a commodity in its own right, and therefore should fluctuate freely with one another.

—Murray N. Rothbard, “Title of Chapter: Subtitle of Chapter,” in Gold Is Money, ed. Hans F. Sennholz, Contributions in Economics and Economic History 12 (Westport, CT: Greenwood Press, 1975), 26-28.

Murray N. Rothbard Criticizes the Chicago School's Definition of the Supply of Money as a Flagrant Example of Question-Begging

The concept of the supply of money plays a vitally important role, in differing ways, in both the Austrian and the Chicago Schools of economics. Yet, neither school has defined the concept in a full or satisfactory manner; as a result, we are never sure to which of the numerous alternative definitions of the money supply either school is referring.

The Chicago School definition is hopeless from the start. For, in a question-begging attempt to reach the conclusion that the money supply is the major determinant of national income, and to reach it by statistical rather than theoretical means, the Chicago School defines the money supply as that entity which correlates most closely with national income. This is one of the most flagrant examples of the Chicagoite desire to avoid essentialist concepts, and to “test” theory by statistical correlation; with the result that the supply of money is not really defined at all. Furthermore, the approach overlooks the fact that statistical correlation cannot establish causal connections; this can only be done by a genuine theory that works with definable and defined concepts.

In Austrian economics, Ludwig von Mises set forth the essentials of the concept of the money supply in his Theory of Money and Credit, but no Austrian has developed the concept since then, and unsettled questions remain (e.g., are savings deposits properly to be included in the money supply?). And since the concept of the supply of money is vital both for the theory and for applied historical analysis of such consequences as inflation and business cycles, it becomes vitally important to try to settle these questions, and to demarcate the supply of money in the modern world. In The Theory of Money and Credit, Mises set down the correct guidelines: money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods on the market.

—Murray N. Rothbard, “Austrian Definitions of the Supply of Money,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 727-728.

Price-Raising and Price-Fixing Agreements Are Extremely Difficult to Arrange and Even Harder to Maintain; A Characteristic Pattern of Cartel Breaking Is “Secret Price-Cutting”

Early in the career of large-scale railroads, some railroad men sought a way out from the rigors of competition and competitive price-cutting. What they sought was the time-honored device of the cartel agreement, in which all the firms in a certain industry agree to raise their selling prices. If the firms could be trusted to abide by the agreement, then all could raise prices and every firm could benefit.

The general public conceives of price-raising and price-fixing agreements to be as easy as a whispered conversation over cocktails at the club. They are, however, extremely difficult to arrange and even harder to maintain. For prices have been driven low by the competition of supply and production; in order to raise prices successfully, the firms will also have to agree to cut production. And there is the sticking point: for no business firm, no entrepreneur, and no manager likes to cut production. What they prefer to do is expand. And, if the businessman is to agree, grudgingly, to cut production, he has to make sure that his competitors will do the same. And then there will be interminable quarrels about how much production each firm is supposed to cut. Thus, if several firms are, collectively, producing 1 million tons of Metal X and selling it at $100 a ton, and the firms wish to agree to raise the price to $150 a ton, they will have to agree on how far below the million tons to cut production, and who should cut how much. And such agreements are at best very difficult to arrive at.

But this is only the beginning of the headaches in store for our cartelists. Generally, they will agree on quota production cuts under the output of a base year, usually the current year of operation. So, if the cartel is being formed in the year 1978, firms A, B, C, etc. may each agree to cut its output in 1979 20% below the previous year. But very quickly in the cartel agreement, and more and more as time goes on, human nature is such that each businessman and manager is thinking as follows: “Darn it, why am I stuck with the maximum production based on 1978 production? This is now 1979 (or 1980, etc.) and now we have installed such-and-such a new process, or we have such-and-such a hotshot product or salesman, that I know,  if our company were all free to compete and to cut prices, we could sell more, pick up a larger share of the market, and make more profits, than we did that year.” As 1978 recedes more and more into the past, and 1978 conditions become more obsolete, each firm chafes increasingly at the bit, longing to be able to cut prices and compete once more. A firm might petition the cartel for an increased quota, but other firms, whose production would have to be cut, would protest bitterly and turn down the request.

Eventually, the internal pressures within the cartel become too great, and the cartel falls apart, prices tumbling once more. A characteristic pattern of cartel breaking is secret price-cutting. The restless firm, anxious to cut prices, decides to try to have its cake and eat it too. While its boobish fellow-producers keep sticking to the agreed cartel price of, say, $150 a ton, our hypothetical firm approaches a few customers whom it is anxious to keep, or others whom it is eager to acquire. “Look, because you’re such a great person and your firm is such a good one, I’m going to let you have our metal for $130 a ton. In return, I want you to keep quiet about it, so that your and our competitors won’t find out about the deal.” For a few months, this will work, and the firm will be reaping extra profits at its competitors’ expense. But, truth will get out, and eventually the word spreads to the firm’s other customers and competitors about the secret price-cut. Other customers will demand similar treatment, the competitors will self-righteously denounce our firm as a “rate-buster,” a “cheat,” and a traitor, and the cartel will dissolve in intensified competition, price-cutting, and intra- industry recriminations.

--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 56-58.

Businessmen or Manufacturers Can Either Be Genuine Free Enterprisers or Statists, But Bankers Are Inherently Inclined Toward Statism

Businessmen or manufacturers can either be genuine free enterprisers or statists; they can either make their way on the free market or seek special government favors and privileges. They choose according to their individual preferences and values. But bankers are inherently inclined toward statism.

Commercial bankers, engaged as they are in unsound fractional reserve credit, are, in the free market, always teetering on the edge of bankruptcy. Hence they are always reaching for government aid and bailout.

Investment bankers do much of their business underwriting government bonds, in the United States and abroad. Therefore, they have a vested interest in promoting deficits and in forcing taxpayers to redeem government debt. Both sets of bankers, then, tend to be tied in with government policy, and try to influence and control government actions in domestic and foreign affairs.

--Murray N. Rothbard, Wall Street, Banks, and American Foreign Policy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 1.

Central Banking Works Like a Cozy Compulsory Bank Cartel to Expand the Banks' Liabilities and the Banks Expand on a Larger Base of Cash in the Form of Central Bank Notes

But if banking is the cause of the business cycle, aren’t the banks also a part of the private market economy, and can’t we therefore say that the free market is still the culprit, if only in the banking segment of that free market? The answer is No, for the banks, for one thing, would never be able to expand credit in concert were it not for the intervention and encouragement of government. For if banks were truly competitive, any expansion of credit by one bank would quickly pile up the debts of that bank in its competitors, and its competitors would quickly call upon the expanding bank for redemption in cash. In short, a bank’s rivals will call upon it for redemption in gold or cash in the same way as do foreigners, except that the process is much faster and would nip any incipient inflation in the bud before it got started. Banks can only expand comfortably in unison when a Central Bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system. . . .

Not that the banks complain about this intervention; for it is the establishment of central banking that makes long-term bank credit expansion possible, since the expansion of Central Bank notes provides added cash reserves for the entire banking system and permits all the commercial banks to expand their credit together. Central banking works like a cozy compulsory bank cartel to expand the banks’ liabilities; and the banks are now able to expand on a larger base of cash in the form of central bank notes as well as gold.

So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression- adjustment comes into play.

--Murray N. Rothbard, Economic Depressions: Their Cause and Cure (Auburn, AL: Ludwig von Mises Institute, 2009), 26-28.

The Purchasing Power or the “Objective Exchange-Value” of Money Is Determined by the Intersection of the Money Stock and the Demand for Cash Balance Schedule

The purchasing power of the money unit, which Mises also termed the “objective exchange-value” of money, was then determined, as in the usual supply-and-demand analysis, by the intersection of the money stock and the demand for cash balance schedule. We can see this visually by putting the purchasing power of the money unit on the y-axis and the quantity of money on the x-axis of the conventional two-dimensional diagram corresponding to the price of any good and its quantity. Mises wrapped up the analysis by pointing out that the total supply of money at any given time is no more or less than the sum of the individual cash balances at that time. No money in a society remains unowned by someone and is therefore outside some individual’s cash balances.

While, for purposes of convenience, Mises’s analysis may be expressed in the usual supply-and demand diagram with the purchasing power of the money unit serving as the price of money, relying solely on such a simplified diagram falsifies the theory. For, as Mises pointed out in a brilliant analysis whose lessons have still not been absorbed in the mainstream of economic theory, the purchasing power of the money unit is not simply the inverse of the so-called price level of goods and services.

—Murray N. Rothbard, “The Austrian Theory of Money,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 686.

It Is Up to Us Citizens to Try to Do on Our Own What the Government Is Failing to Do for Us Because We Can Hardly Expect the Government to Be of Any Help

Domestic anarchy, a possible Communist-Bolshevik uprising, and enemy occupation, these are all conceivable consequences resulting from the collapse of our currency. If we wish to avoid all these eventualities, we must prepare for the day of the catastrophe. We can hardly expect the government to be of any help. For five years the Ministry of Finance has not only pursued a disastrous inflationary course but has repeatedly tried to defend it. Beyond that, it has accelerated the depreciation of the crown by misguided measures that stemmed from its complete blindness to the single true cause of the monetary depreciation. It can hardly be assumed that it will now suddenly see the light. Even those influential financial policymakers who have an insight into the economic nexus have not been able to swim against the tide of prevailing ideas. It is up to us citizens to try to do on our own what the government is failing to do for us. All we can hope for from the government is that it will not stymie the endeavors of its private citizens. In their own interest and in the interest of the community, banks as well as large industrial and commercial enterprises must take the necessary preparatory steps to avert the catastrophic consequences that will follow from the collapse of the currency.

--Ludwig von Mises, “On the Actions to Be Taken in the Face of Progressive Currency Depreciation,” in Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, ed. Richard M. Ebeling, vol. 2 of Selected Writings of Ludwig von Mises (Indianapolis: Liberty Fund, 2002), 53.

Lord Keynes, the Principal Author of Bretton Woods, Boasted That They Set Up “the Exact Opposite of a Gold Standard” (They Set Up a “Gold-Exchange” Standard)

Let us, at the cost of repetition, remind ourselves of what really went wrong. The Bretton Woods agreements never seriously considered the return of each signatory nation to a gold standard. Lord Keynes, their principal author, even boasted that they set up “the exact opposite of a gold standard.” In any case, what Bretton Woods really set up was what used to be called a “gold-exchange” standard. Every other country in the scheme undertook simply to keep its own currency unit convertible into dollars. The United States alone undertook (on the demand of foreign central banks) to keep its own currency unit directly convertible into gold.

Neither the politicians of foreign countries, nor unfortunately of our own, realized the awesome responsibility that this scheme put on the American banking and currency authorities to refrain from excessive credit expansion. The result was that when President Nixon closed the American gold window on August 15, 1971, our gold reserves amounted to only about 2 per cent of our outstanding currency and demand and time bank deposits ($10,132 million of gold vs. $454,500 million of M2). In other words, there was only $2.23 in gold to redeem every $100 of paper promises. But this takes no account of outstanding “Eurodollars,” or even of the outstanding currency and bank deposits of all the foreign signatories to Bretton Woods. The ultimate gold reserves on which the conversion burden could legally fall under the system must have been only some small fraction of 1 per cent of the total paper obligations against them. Even if the American Congress, and our own banking and currency authorities, had acted far more responsibly, the original Bretton Woods system was inherently impossible to maintain.

—Henry Hazlitt, introduction to From Bretton Woods to World Inflation: A Study of Causes and Consequences (Chicago: Regnery Gateway, 1984), 11-12.

Recently (Late 1922, Early 1923), the German Reich Has Provided a Picture of What Must Happen When People Believe that the Course of Monetary Depreciation Is Not Going to Stop

In the long run, trade is not helped by a monetary unit which continually deteriorates in value. Such a monetary unit cannot be used as a “standard of deferred payments.” Another intermediary must be found for all transactions in which money and goods or services are not exchanged simultaneously. Nor is a monetary unit which continually depreciates in value serviceable for cash transactions either. Everyone becomes anxious to keep his cash holding, on which he continually suffers losses, as low as possible. All incoming money will be quickly spent. When purchases are made merely to get rid of money, which is shrinking in value, by exchanging it for goods of more enduring worth, higher prices will be paid than are otherwise indicated by other current market relationships.

In recent months, the German Reich has provided a rough picture of what must happen, once the people come to believe that the course of monetary depreciation is not going to be halted. If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency.

--Ludwig von Mises, The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 3-4.

Mises Corrected a Fallacy Held by a Leading Official of the Hungarian Soviet Republic Who Assumed that the Valuation of the Monetary Unit Depended on the Wealth of the Country

In the course of speculation in stocks and securities, the speculator has developed the procedure which is his tool in trade. What he learned there he now tries to apply in the field of foreign exchange speculations. His experience has been that stocks which have dropped sharply on the market usually offer favorable investment opportunities and so he believes the situation to be similar with respect to the monetary unit. He looks on the monetary unit as if it were a share of stock in the government. When the German mark was quoted in Zurich at ten francs, one banker said: “Now is the time to buy marks. The German economy is surely poorer today than before the war so that a lower evaluation for the mark is justified. Yet the wealth of the German people has certainly not fallen to a twelfth of their prewar assets. Thus, the mark must rise in value.” And when the Polish mark had fallen to five francs in Zurich, another banker said: “To me this low price is incomprehensible! Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher.”

Similarly, in the spring of 1919, a leading official of the Hungarian Soviet Republic told me: “Actually, the paper money issued by the Hungarian Soviet Republic should have the highest rate of exchange, except for that of Russia. Next to the Russian government, the Hungarian government, by socializing private property throughout Hungary, has become the richest and thus the most credit-worthy in the world.”

These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. Nevertheless, even though the theory of these bankers is false, and must eventually lead to losses for all who use it as a guide for action, it can temporarily slow down and even put a stop to the decline in the foreign exchange value of the monetary unit.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 17-18.

The Failure of All “Leftist” Economic Doctrines Is Precisely Their Misconstruction of the Meaning of Saving, Capital Accumulation, and Investment

Every account of the history of modern culture must first of all distinguish between two groups of nations, viz. those that have developed a system which made domestic saving and the large-scale accumulation of capital possible and those that did not. The lamentable failure of all “leftist” economic doctrines from Saint-Simonism and Marxism down to the “imperialism” theory of Luxemburg, Lenin, and Hilferding and to Keynesianism is precisely to be seen in their misconstruction of the meaning of saving, capital accumulation, and investment. In the great ideological conflict of the nineteenth century the Liberals and their spokesmen, the much abused “vulgar economists,” were right in proclaiming as their main thesis: there is but one means to improve the material conditions of all of the people, viz., to accelerate the accumulation of capital as against the increase in population.

The great age of foreign investment came to an inglorious end when the twentieth century’s doctrinaires were no longer prepared to see any difference between the devastation of a country by military action and the investment of foreign capital for the construction of factories and transportation facilities. Each of these two entirely different procedures is called conquest and imperialism. The expropriation of foreign investments is styled “liberation.” It is, if at all, only mildly censured by the jurists and economists of the “capitalistic sector” of the world. No wonder that the eagerness to invest in foreign countries disappeared. Foreign aid tries now to fill the gap. As Miss Ayn Rand defined it, this new doctrine requests that our wealth should be given away to the peoples of Asia and Africa, “with apologies for the fact that we have produced it while they haven’t.”

--Ludwig von Mises, “The Outlook for Saving and Investment,” in Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 1990), 47.

Regarding the Core Message of the Classical Economists, the One Pertaining to the Wealth of Nations, the Austrian School Has Been Their Intellectual Heirs

The classical economists had rejected the notion that overall monetary spending — in current jargon: aggregate demand — is a driving force of economic growth. The true causes of the wealth of nations are nonmonetary factors such as the division of labor and the accumulation of capital through savings. Money comes into play as an intermediary of exchange and as a store of value. Money prices are also fundamental for business accounting and economic calculation. But money delivers all these benefits irrespective of its quantity. A small money stock provides them just as well as a bigger one. It is therefore not possible to pull a society out of poverty, or to make it more affluent, by increasing the money stock. By contrast, such objectives can be achieved through technological progress, through increased frugality, and through a greater division of labor. They can be achieved through the liberalization of trade and the encouragement of savings.

For more than a century, the Austrian school of economics has almost singlehandedly upheld, defended, and refined these basic contentions. Initially Carl Menger and his disciples had perceived themselves, and were perceived by others, as critics of classical economics. That “revolutionary” perception was correct to the extent that the Austrians, initially, were chiefly engaged in correcting and extending the intellectual edifice of the classics. But in retrospect we see more continuity than rupture. The Austrian school did not aim at supplanting classical economics with a completely new science. Regarding the core message of the classics — the one pertaining to the wealth of nations — they have been their intellectual heirs. They did not seek to demolish the theory of Adam Smith root and branch, but to correct its shortcomings and to develop it.

The core message of the classics is very much out of fashion today — probably just as much as it was at the end of the eighteenth century. As the prevailing way of economic thinking has it, monetary spending is the lubricant and engine of economic activity. Savings are held to be a blight on the social economy, the selfish luxury of the ignorant or the evil, at the expense of the rest of humanity. To promote growth and to combat economic crises, it is crucial to maintain the present level of aggregate spending, and to increase it if possible.

This prevailing theory is precisely the one refuted by Smith and his disciples. Classical economics triumphed over that theory, which Smith called “mercantilism,” but its triumph was short-lived. Starting in the 1870s, at the very moment of the appearance of the Austrian school, mercantilism started its comeback, at first slowly, but then in ever-increasing speed. In the 1930s it was led to triumph under the leadership of Lord Keynes.

--Jörg Guido Hülsmann, foreword to Finance Behind the Veil of Money: The Economics of Capital, Interest, and the Financial Market, by Eduard Braun (West Palm Beach: Liberty.me, 2014), e-book.

Those Spurning Entrepreneurial Profit as “Unearned” Mean that It Is Lucre Unfairly Withheld from the Workers and/or Consumers

Those who spurn entrepreneurial profit as “unearned” mean that it is lucre unfairly withheld either from the workers or from the consumers or from both. Such is the idea underlying the alleged “right to the whole produce of labor” and the Marxian doctrine of exploitation. It can be said that most governments—if not all—and the immense majority of our contemporaries by and large endorse this opinion although some of them are generous enough to acquiesce in the suggestion that a fraction of profits should be left to the “exploiters.” . . .

Those who want to abolish profit are guided by the idea that this confiscation would improve the material well-being of all non-entrepreneurs. In their eyes the abolition of profit is not an ultimate end but a means for the attainment of a definite end, viz., the enrichment of the non-entrepreneurs. Whether this end can really be attained by the employment of this means and whether the employment of this means does not perhaps bring about some other effects which may to some or to all people appear more undesirable than conditions before the employment of this means, these are questions which economics is called upon to examine.

The idea to abolish profit for the advantage of the consumers involves that the entrepreneur should be forced to sell the products at prices not exceeding the costs of production expended. As such prices are, for all articles the sale of which would have brought profit, below the potential market price, the available supply is not sufficient to make it possible for all those who want to buy at these prices to acquire the articles. The market is paralyzed by the maximum price decree. It can no longer allocate the products to the consumers. A system of rationing must be adopted.

The suggestion to abolish the entrepreneur’s profit for the benefit of the employees aims not at the abolition of profit. It aims at wresting it from the hands of the entrepreneur and handing it over to his employees. . . .

If, for the sake of argument, we were prepared to neglect any reference to the problem of capital accumulation, we would still have to realize that giving profit to the employees must result in rigidity of the once attained state of production and preclude any adjustment, improvement and progress.

In fact, the scheme would transfer ownership of the capital invested into the hands of the employees. It would be tantamount to the establishment of syndicalism and would generate all the effects of syndicalism, a system which no author or reformer ever had the courage to advocate openly.

A third solution of the problem would be to confiscate all the profits earned by the entrepreneurs for the benefit of the state. A one hundred per cent tax on profi ts would accomplish this task. It would transform the entrepreneurs into irresponsible administrators of all plants and workshops. They would no longer be subject to the supremacy of the buying public. They would just be people who have the power to deal with production as it pleases them.

The policies of all contemporary governments which have not adopted outright socialism apply all these three schemes jointly. They confiscate by various measures of price control a part of the potential profits for the alleged benefit of the consumers. They support the labor unions in their endeavors to wrest, under the ability-to-pay principle of wage determination, a part of the profits from the entrepreneurs. And, last but not least, they are intent upon confiscating, by progressive income taxes, special taxes on corporation income, and “excess profits” taxes, an ever-increasing part of profits for public revenue. It can easily be seen that these policies if continued will very soon succeed in abolishing entrepreneurial profit altogether.

--Ludwig von Mises, “Profit and Loss,” in Planning for Freedom: Let the Market System Work; A Collection of Essays and Addresses, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2008), 158-161.

Following the Doctrines of Silvio Gesell Who Wanted to Create “Free Money,” Lord Keynes Wanted Credit Expansion to Perform the “Miracle” of Turning a Stone into Bread

The stock-in-trade of all Socialist authors is the idea that there is potential plenty and that the substitution of socialism for capitalism would make it possible to give to everybody “according to his needs.” Other authors want to bring about this paradise by a reform of the monetary and credit system. As they see it, all that is lacking is more money and credit. They consider that the rate of interest is a phenomenon artificially created by the man-made scarcity of the “means of payment.” In hundreds, even thousands, of books and pamphlets they passionately blame the “orthodox” economists for their reluctance to admit that inflationist and expansionist doctrines are sound. All evils, they repeat again and again, are caused by the erroneous teachings of the “dismal science” of economics and the “credit monopoly” of the bankers and usurers. To unchain money from the fetters of “restrictionism,” to create free money (Freigeld, in the terminology of Silvio Gesell) and to grant cheap or even gratuitous credit, is the main plank in their political platform.

Such ideas appeal to the uninformed masses. And they are very popular with governments committed to a policy of increasing the quantity both of money in circulation and of deposits subject to check. However, the inflationist governments and parties have not been ready to admit openly their endorsement of the tenets of the inflationists. While most countries embarked upon inflation and on a policy of easy money, the literary champions of inflationism were still spurned as “monetary cranks.” Their doctrines were not taught at the universities.

John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The “Keynesian Revolution” consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into official documents. Credit expansion, says the Paper of the British Experts of April 8, 1943, performs the “miracle . . . of turning a stone into bread.” The author of this document was, of course, Keynes. Great Britain has indeed traveled a long way to this statement from Hume's and Mill's views on miracles.

--Ludwig von Mises, “Stones into Bread: The Keynesian Miracle,” in The Critics of Keynesian Economics, ed. Henry Hazlitt (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 305-306.

Keynes's Difficulties with the Classical Savings Theory of Growth and His Misidentification of Saving with the Hoarding of Cash Are Illustrated by a Thrift Campaign in His Banana Economy

It is easy to understand Keynes’s difficulties with the classical savings theory of growth when one recognizes his misidentification of saving with the hoarding of cash. In the Treatise Keynes illustrates this misunderstanding with a banana economy model in which a thrift campaign leads to a fall in the demand for bananas, a fall in the price level, and a loss to the plantation owners who then lay off some of their employees (1930). Had Keynes conceived of saving as the transfer of purchasing power from income earners to borrowers or issuers of financial assets, he might have realized that saving does not reduce the total demand for bananas. Some borrowers of the savings would use the funds to purchase bananas for consumption, while others would purchase bananas for processing into banana products, such as banana cream pies.

--James C. W. Ahiakpor, “The Classical Theory of Growth and Keynes's Paradox of Thrift,” in Classical Macroeconomics: Some Modern Variations and Distortions (London: Routledge Taylor and Francis e-Library, 2005), 154.

The Actual Originator of Say's Law Was James Mill Who Was Responding to an 1807 Pamphlet by William Spence; Spence Argued Demand Was at the Heart of the Wealth Creation Process

To understand the actual meaning of Say's Law, and why its disappearance has made the most profound difference to economic theory, the best place to start is with the controversy out of which Say's Law grew. Although the law of markets is now generally referred to as Say's Law, Say was not in fact the originator of the essential proposition denying the possibility of demand deficiency. The actual originator of Say's Law was James Mill who was responding to an 1807 pamphlet written by William Spence. Spence had argued that it was demand which was at the heart of the wealth creation process:

It is clear, then, that expenditure, not parsimony, is the province of the class of land proprietors, and, that it is on the due performance of this duty, by the class in question, that the production of national wealth depends. And not only does the production of national wealth depend upon the expenditure of the class of land proprietors, but, for the due increase of this wealth, and for the constantly progressive maintenance of the prosperity of the community, it is absolutely requisite, that this class should go on progressively increasing its expenditure. 

It is spending which causes wealth to grow, not saving. And Spence makes no bones about it as this example shows:

The prosperity of the country would be as much promoted, if an owner of an estate of 10,000 l. a year, were to expend this sum in employing 500 men to blow glass bubbles, to be broken as soon as made, as if he employed the same number in building a splendid palace. . . . The 500 glass blowers would require as much wealth to be brought into existence from the soil, would consume as much food, and would consequently be as prosperous, as the 500 palace builders. 

 Spence owns that it would be better to build palaces since this would add to the capital stock of the nation. But even so, the creation of no value at all would have the same economic effect on the level of prosperity as the building of a palace. There is no substantive difference between this and Keynes in the General Theory.

Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better. . . . 

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again. . . there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a great deal greater than it actually is. 

 Keynes too stated that it would be better to build something useful, but argued that even completely unproductive spending would add to wealth. And for both Keynes and Spence, it was the restrictions in demand caused by saving which was at the heart of the problem.

It was to this kind of argument in Spence that James Mill replied. And this is why the argument moves in the way it does from demand deficiency to the causes of recession. Mill finds it beyond comprehension that someone should recommend wasteful expenditure as a means of generating wealth. Spending is a depletion of wealth while saving adds to it. The idea of spending one's way to prosperity was the worst sort of nonsense to Mill as it was to the entire classical school.

--Steven Kates, “On the True Meaning of Say's Law,” Eastern Economic Journal 23, no. 2 (Spring 1997): 196-197.